The Return Trends At Legend Strategy International Holdings Group (HKG:1355) Look Promising

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Legend Strategy International Holdings Group (HKG:1355) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Legend Strategy International Holdings Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.068 = HK$9.4m ÷ (HK$228m - HK$91m) (Based on the trailing twelve months to June 2021).

Therefore, Legend Strategy International Holdings Group has an ROCE of 6.8%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 2.9%.

View our latest analysis for Legend Strategy International Holdings Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Legend Strategy International Holdings Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Legend Strategy International Holdings Group, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Legend Strategy International Holdings Group is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Legend Strategy International Holdings Group is utilizing 242% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 40%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

Long story short, we're delighted to see that Legend Strategy International Holdings Group's reinvestment activities have paid off and the company is now profitable. However the stock is down a substantial 75% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Legend Strategy International Holdings Group (of which 3 are a bit concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.